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Investments and Globalization
By William Parmenter, editor
“The Impact of Globalization on Your Investments” was the title of the talk by three principals of Astor Capital Management on May 16, at the Los Angeles chapter AAII meeting at Skirball Center
Lead-off speaker was Mark S. Wolfkiel, senior vice president of the firm, who started his financial services career more than a score of years ago in Chicago as a trader.
Globalization can be discussed in terms of political, social and economic aspects. The talk dealt with the economic aspects of globalization.
In the 1950s Modern Portfolio Theory came up with the idea of diversifying investments by investing in three classes of non-correlated assets. They were stocks, bonds and alternative investments. In those days, foreign stocks were regarded as alternative investments.
But, no longer. Foreign stocks are regarded as in the same class as domestic stocks, due to globalization. Examples are: Bridgestone, (Japan), Budweiser, (Belgium), Gerber (Switzerland), and Aquafresh, 7-Up, Miller Beer, and Woolite (all U.K.).
Likewise big domestic stocks are also foreign, due to their foreign revenue. For example 60 percent of the Dow 30 companies get more than 50 percent of their revenue from foreign countries. Intel gets 80 percent of its revenue from abroad, while IBM gets 60 percent of its revenue from overseas.
As for the S&P 500 companies, (which accounts for about two-thirds of the stock market’s capitalization,) they get 44.2% of their revenues from abroad.
Another indicator of globalization is the amount of U.S. government debt held abroad. China is the leader with $739.6 billion, followed by Japan with $634.8 billion, and the oil exporting companies with $186.3 billion.
In terms of the ratio of debt to GDP, the U.S. is fifteenth. The other 14 leading countries are in Europe, with Ireland holding down the position of number one with a ratio of 811 percent.
The above indicators of globalization refute the old idea that foreign stock was a non-correlated asset class.
Peter Hanson took the microphone and added that large U.S. companies are global conglomerates. They operate through hubs, centers through which they handle their foreign exchange (forex) speculations.
Hanson addressed the effect of foreign trade imbalances on the value of the dollar.
A persistent foreign trade deficit makes the dollar weaker, which in turn makes U.S. products cheaper abroad, increasing sales of U.S. products, but foreign products become
Table of ContentsMark Wolfkiel Investments and Globalization p.1
Frank Barbera The Economic Rollercoaster p.3
Joe Falcon Energy, Where Are We Headed? p.5
Don Gimpel The Direction for Energy p.8
Don Gimpel .Education Nuggets p.10 Orange County AAII Meeting Announcements p.10
more expensive in the U.S. and it becomes more expensive to travel abroad. In this case U.S. foreign debt increases and bullion decreases. U.S. mainland assets and resources are bought up by foreign creditors. This is the situation of the U.S. today.
A long-term foreign trade surplus makes the dollar stronger, making the dollar stronger abroad, making U.S. products more expensive overseas, so sales decrease. Foreign products become cheaper in the U.S. and it becomes cheaper for U.S. citizens to travel abroad. In this case the U.S. Treasury stockpiles money and bullion increases. American investors reach out to buy up foreign assets and resources. This is the situation of China today, which is piling up foreign reserves, and aggressively buying up foreign commodity resources (especially in Africa) and energy resources.
The microphone was passed to Jim Mott, who addressed asset allocation.
Mott said he checked with his broker on what was hot right now. Answer: canned goods and ammunition.
Does that mean we should be out of the market, just because the market, (in a secular bear), plunged off a cliff in fourth quarter 2008?
Mott’s incomplete answer to that was: If you don’t try, you can’t do; if you don’t do, why are you here? Catchy as the answer was, as a slogan, it did not address the issue of staying in a market that has been vaporizing peoples’ life savings.
Is a good allocation scheme the answer?
According to Dr. John Litner, of Harvard University, a good allocation scheme helps. He advocates 45 percent stocks, 35 percent in bonds,
and 20 percent in alternative investments. Alternative investments include REITs, forex and commodities.
Wolfskiel resumed speaking, talking about due diligence. He enumerated seven points to look for in a managed account product.
Is the firm registered with the CFTC (check with www.cftc/gov). Is the firm a member of the NFA (National Futures Assn.). Does the firm have a disclosure document? Has it been reviewed by the NFA?
Does the firm have an independently compiled performance track record? Is there an active outside auditor? Is there transparency concerning trades executed? Are those trades on theme, or off? What kind of redemption liquidity is there? Can you avoid lock-up periods?
Astor Management trades in forex. In 2007, $3.2 trillion was traded daily—the world’s biggest market. The volume is 300 times greater than the NASDAQ market. Forex trades 24 hours a day five days a week.
Forex market participants include central banks, commercial banks, investment banks, large corporate treasure departments, investment managers, hedge funds, retail brokers and managed accounts.
Astor Capital Management works with the Gibraltar FX Program. Comparative results from October, 2007 until April, 2009 were:
Los Angeles County Meeting ScheduleWestside Computer Group – Don Gimpel, 310/276-9875 Sat. June. 6, at 10:30 a.m., Veterans of Foreign Wars Memorial Bldg. Culver Blvd. & Overland Avenue, Culver City, Topic Market Timing with Steve Hunter. Special Event, as Hunter has extremely sophisticated software.
Pasadena Group – Meets at 7 p.m., meets at Lamanda Library, 140 S. Altadena Drive, Pasadena. (Meets third Tues. of the month, except for August and December.) Topic TBA
Mutual Fund Group – Gunter Hagen 310/457-7404, opic and date TBA., at Fairview Library, 2101 Ocean Park Blvd., Santa Monica. The meeting is free to the public
Stock Selection Group—Norm Langhout, 310/391-6430, . Fourth Wednesday of the month at 7 p.m. Fairview Library, 2101 Ocean Park Blvd., Santa Monica. Topic TBA
San Fernando Valley Group – Mid Valley Library Community Room, 16244 Nordhoff St. North Hills, Topic, TBA
IBD Meet-Up/AAII CANSLIM Group –Fairview Library, 2101 Ocean Park Blvd., Santa Monica. Date and topic TBA
Los Angeles Chapter Skirball Center at 9 a.m, Sat. June 20. Timothy Bock, on “Wealth Engineering,” and Douglas Fabian, on “ETF Strategies in a Difficult Market”
Gibraltar: $1,000 went to $1,260.
DJIA and S&P 500: $1,000 went to $580.
MSCI EAFE: $1,000 went to $500.
Astor uses algorithms and professional software. Their thousand algorithms take advantage as quickly as possible of the smallest discrepancies in prices in different currency markets.
In the Q and A session, following the talk, the question was posed, what is the difference between Astor and Long Term Capital Management (which infamously imploded in 1998, threatening to take the financial system down with it).
Astor caps its leverage at 20 to l, whereas LTCM used leverage up to 200 to 1. Astor caps its trades at $50 million, has no Nobel Prize winners on board and trades only in forex.
What about the tax situation on profits? The tax situation is about 15 percent better than a straight stock portfolio.
Contact information: Astor Capital Management, phone 312-207-2000, website www.astorcm.com, located at 233 S. Wacker Drive, Sears Tower 94th floor, Chicago Ill, 60606.
Account constraints: minimum account is $50,000: management fee is 2 percent; performance fee is 20 percent, off the high water mark; no lock-up period; program liquidity is one business day.
Riding the Economic Rollercoaster
By William Parmenter, editor
Frank Barbera, CMT, gave the audience an exciting, and authoritative ride on what he called the ‘economic rollercoaster’—from deflation to hyper-stagflation.
People were grabbing the armrests of their seats to hold on during Barbara’s cyclone-racer run through the volatile financial scene on May 16 at the Los Angeles AAII chapter meeting at Skirball Center.
Barbera is well-known to AAII Los Angeles chapter as a popular annual speaker. He is the vice president for marketing for Sierra Core Retirement Funds and editor of the Gold Stock Technician Newsletter.
Barbera’s lucid and penetrating weekly columns of financial technical analysis of the economic scene can be found by clicking on his name in the right-hand rail column on the home page of Financial Sense Observations, found at www.financialsense.com.
His column entitled, Stock Market Update, dated May 12, is recommended as a good introduction and companion to his presentation at Skirball on May 16. (In that column he reviews the technical data on breadth, sentiment and volume to make the case that the market is poised, after a sharp bear-market rally, for another steep leg down in a secular bear market.)
Barbera opened his talk with a rapid review of the 2005 to 2009 period. Talking about mortgage defaults, and the great credit bubble, he pointed out that technical analysis gave advance warning to the emerging credit crisis and collapse.
In an unprecedented situation, mortgage equity withdrawals, when subtracted from growth, made economic growth less than it was represented. The secular bear market started in 2000.
What happened? The credit markets were nuked with a neutron bomb, as the economy entered the deepest global recession in 60 years. Countless financial institutions were vaporized in the global bomb burst.
Global market cap declined by $30 trillion. U.S. real estate plunged $13 trillion. Unemployment zoomed, with hidden unemployment making the actual jobless rate about double the official U.S. number.
Official U.S. unemployment is 8 percent. Counting those who gave up looking for a job, the rate is 13 percent. The actual rate, taking the fudge out of government numbers is 17 percent. (See John Williams at www.shadowstats.com. for his three-level evaluation of employment statistics.)
Barbera moved on to the present and the outlook for the future. The S&P 500 rallied this spring on a scale not seen since the 1930s. Is that a harbinger of recovery?
No, according to Barbera, it was a bear market rally. Look at the chart of the S&P 500 against the 20-month moving average. The moving average is moving sharply lower. No way have we seen the bottom, more decline is coming. It takes months to build a base to develop the foundation for a recovery to occur.
(See the chart on page 2 of Barbera’s column, Stock Market Update, previously cited. Other charts referred to in this article will be found in the same column.)
Looking at market breadth, various gauges point in a negative direction. One, the 200-day moving average of the CBOE Options A/D ratio is way below its declining 200-day moving average and falling at a very sharp pace. Two, the nine-week RSI of the CBOE Ratio has a strong down tend, and is all the way back up to a fully overbought condition. Three, the NASDAQ McClellan Summation Index, having some of the most overbought values ever seen, is poised to have NASDAQ give back much of its recent gains.
Considering sentiment, Barbera’s Composite Sentiment Index has risen to near zero, with odds being high that it will stall and reverse to retest the lows. The ‘green shoots’ blowing through the economy, in Barbera’s view, constitute evidence of a counter trend decline, a correction, that should be dead ahead.
As for volume, Barbera monitors volume and money flow via watching the NASDAQ market. The recent bounce in price was much more impressive than the bounce in volume, a red flag, supporting that the long-term moving average of NASDAQ Money Flow is still declining sharply.
For those who think a new bull market is on the way, the best thing the market can do is pull back and correct, allowing the market the potential to stabilize, build a base and possibly rally later on.
For those who think the bear case is more persuasive, the economy may be slipping into a depression. Barbera rates that possibility with a 40 percent probability, forecasting that the S&P 500 could decline in the next two years to 400. Equity investors need to play good defense, especially over the next two years.
If the market declines, do not buy into a lot of cheerleading, because it could get ugly.
If you see that the market cannot go up on good news, it means the market is in great trouble.
Both Japan and China are going to buy fewer U.S. Treasuries. They are not going to fund the U.S. anymore. A backlash presages a rise in rates.
The dollar index could trend lower this summer. A falling dollar and rising rates are things investors do not want to see.
The price of gold, a capped money supply, could go up. From June through December, 2009 there could be a 40 to 50 percent gain in gold mining stock prices.
Mining stocks can be very trying on the nerves, but, because they are very volatile, they are the only sector that gives you a chance to make 20 percent every year. You have to get in and get your 20 percent and get out for the rest of the year.