Wednesday, April 25, 2012

The Japanese Experience

Click To See Larger Chart
I don't know if people are aware of the story, but there is a particular reason Japanese auto imports grew to dominate the North American industry.  The single biggest reason, in my opinion, was product.  They made a better car for less, and targeted the entry level buyer.  Their target market was key, since they were limited by North American quotas at the time.  Why target the lower-priced entry level when they could have tried to go after the higher-end, more expensive category?  After all, that is what the North American car makers would do, and they did - SUV, gas guzzlers anyone?

No, the Japanese were smarter than that, or were they?  The answer is yes, and no.  The Japanese learned from their own experience that customer loyalty was important.  Satisfied customers tended to buy again from the same company.  Not only did they buy from the same company, they tended to trade up, as well.  After paying off their first car, they tended to buy a more expensive one the next time.  If Japanese customers did so, what made them believe the U.S. customers would do the same?  Demographics, plain and simple.  With an older average Japanese population, it was expected the North American population would follow a pattern similar to that of the Japanese consumer.  And it did.  Brilliant, yes; original, no.

Same Old Same Old
Now, the question is, are we going to learn from the Japanese experience.  I don't mean their auto industry, but their economy.  Sure, there are some fundamental differences in the Japanese and U.S. economies, but let's take a look at Japan over the last two decades.  Their problems really began in the late 1980's.  There were a number of banks misbehaving, and a housing bubble that burst (sound familiar?)  For much of the last two decades, Japan has been trying to stimulate itself out of recession.  The central bank continues to buy government bonds to provide liquidity to the government, and the economy.

Is it working?  By all accounts, Japan's economic course is unsustainable.  While growth has never  recovered, to any great extent, the government debt continues to rise.  The last data point in the chart above was 2008.  Their debt level as a percentage of GDP has only increased since then.

No, we have tried giving our money to the rich (one percent) with the expectation of jobs, in return.  Clearly that didn't work.  So whose idea do you think it was in the first place?  Now, we are being asked to believe that when it comes to governments, we can borrow our way around the trouble caused by, among other things, too much government debt from bailing out some of the richest corporations on the planet.  And whose idea do you think that was, and is?

Micro Economics
We need to do as they say, and not as they do.  We need to live within our means, and concentrate during these difficult times on reducing debt, and not just maintaining the status quo.  For you and I, reducing expenses is easier than increasing revenues, although we could all use some additional investment income.  The Japanese experience should teach us it is going to take a very long time before things actually begin to start to get a whole lot better!

Do you think we will learn from history?

Thursday, April 19, 2012

The Case For Market Volatility

Click Here To See The Video
Signs of Struggle
With an economy which generates almost 18 trillion (US) dollars of goods and services, the European Union is the largest economy in the world.  In the video, Larry Berman gives the litany of problems facing that economy, and consequently, the world economy, as well.  The level of European debt, demographics, and fiscal austerity all add up to a struggling economy and higher than usual stock market volatility for a very long period of time to come.

Volatility; Not Demand
Sovereign debt levels world wide mean political and economic volatility unlike anything we have seen in generations. All this, just at the time the Baby Boomers are beginning to ease back on their spending as their need for housing, and everything that facilitates going to work every day decreases.

New Paradigm
We have just experienced the peak of a period of economic growth unlike anything the world has ever seen.  The engines are low on fuel.  I hate to be the bearer of bad news, but we are not going to see the markets return to all time highs (at least not new highs after adjusting for inflation).  Still, the financial services industry continues their steadfast and unwavering support for the Buy and Hold approach despite the fact it makes a better marketing strategy than it does an effective portfolio management strategy.  As long as they receive sufficient participation, they aren't going to be the ones to tell us the bad news, let alone admit the hoax they have funded all of these years at their clients' expense.

The alternative to Buy and Hold?  Buy lower, and sell higher.  What a concept!

Have you, or are you making changes to your approach?

Thursday, April 12, 2012

Peter Hodson and 5I Research

Click Here To Play The Video
Interesting story how a former analyst and fund manager felt enough of a conflict of interest to start his own rating company.  He doesn't give Buy, Sell, Hold ratings since they are used to mislead investors.  Instead 5I Research uses a grade of A, B, C... etc..

In  his company, employees are not allowed to trade the stocks of Canadian companies since that is what they provide ratings for.  He also talks about how management of the companies he would meet with while working as a fund manager would always be giving him a sales pitch instead of being objective.  Compare Hodson's   approach to the major rating agencies that are paid by the firms that they do the ratings of and for.

Clearly, the major rating agencies contributed to the problems leading to the Great Recession.  I have said that I believe the ratings system is broken.  I guess it isn't just me who thinks so.

Monday, April 9, 2012

March 2012 Portfolio Update

Typically, seasonality favours the TSX during March.  Not so this year.  While the TSX was down each week in March, the major U.S. markets were up and down.  Despite the long rally since the third quarter last year, I have been reluctant to chase it.  My own Elliott Wave analysis would suggest a high of 1425.  The S&P 500 Index hit 1419 during the last week of March.

The media talks about the U.S. markets decoupling from the rest of the world markets.  I have my doubts, although the huge government stimulus is having an affect.  Normally the markets should continue higher until the first week of May, but if 1419 is, in fact, the high, then I would not expect any major rally until the last quarter of the year.  According to the Elliott Wave theory, we could see the lows of last fall, again.

My investing horizon remains very short.    

15 month return for TSX @ March 30, 2012 = -7.23
Return for Basic Timing Model using XIU = 5.84
Return for Advanced Timing Model (my returns) = -4.36 percent
Money for charity = $0.00

What are your expectations between now and the end of the year?